Using both a market‐based and an accrual‐based measure of conservatism, we find that firms facing more severe conflicts over dividend policy tend to use more conservative accounting. Furthermore, we document that accounting conservatism is associated with a lower cost of debt after controlling for other determinants of firms' debt costs. Our collective evidence is consistent with the notion that accounting conservatism plays an important role in mitigating bondholder‐shareholder conflicts over dividend policy, and in reducing firms' debt costs.

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